Friday, January 31, 2014

Learning From Adam Smith

“Learning from Adam Smith -
Help at Hand Today: an essay on How the World’s Economies Might be
Justly Optimised”.

This is an interesting essay even for beginners
studying Adam Smith and would benefit to some ‘old hands’ too.The first 25 pages of 44 are devoted to
a well- written, fairly comprehensive account of aspects of Wealth Of Nations,
complete with copious and well-chosen quotations from Smith’s historical
account of the evolution of commercial society from pre-history to the 18th
-19th century, including Britain’s and other European countries’ Empires.

This covers a lot of ground and for many readers may
be new, at least in its coverage in one short essay.

Ian Buckley writes well and clearly, qualities not
always found in this area.

The second theme is an account of the beginning of the
end of colonialism marked by the recommendations by Smith at the end of Wealth
Of Nations (see the very last paragraph). But no European governments followed his
advice, including London after its arrogance lost it its first empire and
immediately embarked on seizing its second Empire (West Indies, South Africa,
India, South-East Asia, Australia, the Pacific and Canada).The over-reaching phenomenon of Empire
building and its associated historical rivalries led to much waste of blood and
treasure on war preparations that diverted much capital (fuelled by taxation
and borrowing), and especially so by the First and Second World wars in the 20th
century.

Ian Buckley is masterly in
his use of politico-historical sources that led up to the First World War in this section, which I am sure
will be informative for many readers of Lost Legacy.

Now, Britain is in its twilight years and continues to
assume a world military role that it can hardly afford the billions required.UK politicians have learned nothing and
tend to regard its past glories as solid evidence that it plays a world role
today and will do so tomorrow. Instead of becoming a beacon for world moral
leadership with its humanitarian impulses and standard-setting, and democratic
institutions, it chooses to assume its continuing role by sullying the positive
sides of its historical reputation and its example.

Adam Smith had a lot to say about Britain’s potential
place in the world that is worth reading, ‘warts and all’.Ian Buckley’s essay in a good place for readers to start
their reflection of what we can learn from Adam Smith.

Theories That Ignore The Real World of the Politics of States Are Not Helpful Operationally

“I am also
struck by the beauty of an economic explanation of the self-regulating free
market economy; how the really great economic thinkers are able to derive the
invisible-hand theorem from the self-interest postulate via the institutional
analysis of private property rights, relative price adjustments, and profit and
loss accounting. Hume, Smith, Ricardo, Say among the classics; Menger,
Bohm-Bawerk, Wicksteed, Wicksell among the early neoclassicals; Mises, Hayek,
Alchian, Buchanan, Coase, Demsetz, Kirzner, V. Smith, and Tullock among the
moderns --- all reflect this beautiful logic of economic theory in the hands of
a skilled practitioner.

The
beautiful theory these thinkers helped to construct and work with, however, was
part blackboard abstraction, and part hard nosed observation of the economic
world. They used the
blackboard economic theory they worked out to understand the world they saw out the window. The purpose
of theory is to do history. But you must use a theory --- there is no
such thing as theory-less observation. You either utilise articulated and
defended theory or you use implicit and undefended theory, but theory is going
to guide interpretation of the world of economic experience.

A lot of
complaining is currently going on about blackboard economics -- some of it is
justified, much of it is VERY confused and ideologically motivated. In
these discussions, however, it seems important to stress two things: (1) the
world of economic life is so intellectually fascinating that taking on the role
of the economic naturalist (to use Robert Frank's term) is an amazing adventure
once you allow yourself to be open to the mystery of the mundane, and (2) you
cannot accomplish (1) without being in possession of a solid understanding of
basic economic theory. Economic theory must be understood as a tool for
social understanding, never as a tool for social control. But in order to
learn theory, you must study the blackboard, follow the logic of an argument,
engage your critical reasoning skills, and adopt the
attitude of a life-long learner.

I discuss this issue in my latest Economic Way of Thinking column for FEE.
Being able to look out the window is our goal, but our vision will be
that much better when improved with the eye-glasses of economic theory as
developed by the classical political economists, the early neoclassical
economists, the Austrian school economists, property rights economists, market
process theorists, and modern political economists -- i.e., what I describe as
"mainline" economics in my “Living Economics: yesterday, today,
tomorrow”. 2012. The Independent Institute – Universidad
Francisco Marroquin).”

Comment

I warmly recommend Peter Boetkk’s introductory text book. It is refreshingly
written (typical of Boettk’s writing style, which, if followed in his teaching,
I can imagine his classes are very popular.

However, sad to say, articulate writing and teaching are quite
independent of the validity of the views expressed therein and while I would
agree with much of what he writes I am not so certain that beyond undergraduate
years the enthusiastic presentation of content is sufficient to be the sum of concerns
about the advice for policies to govern in an economy.

Peter’s
selection of the high contributors to economic theory ("Hume, Smith, Ricardo,
Say among the classics; Menger, Bohm-Bawerk, Wicksteed, Wicksell among the
early neoclassicals; Mises, Hayek, Alchian, Buchanan, Coase, Demsetz, Kirzner,
V. Smith, and Tullock among the moderns") is not an exhaustive selection from
the host of the world’s economists who made seminal contributions.

I am not
suggesting that Peter’s list was meant to be exhaustive, but that list or a
different list identifies the problem.Those of a different persuasion, or ideology, would produce a “beautiful
logic of economic theory” and would lay claim to be “skilled practitioners”. Or worse, “skilled practitioners”
or not with “beautiful logic” or with back of an envelope ravings and
particular bees in their bonnets, can and have formed other theories(or as Keynes once remarked, “heard
voices in the night”).

In short,
economies are not pristine beautiful, nor self-managed. They exist in human
societies and have always been integrated within the social relations of
varying degrees of sophistication, that is, within politics.Pristine beauty is not a characteristic
of any known economy now, recent, near past, distant past or very
distant past.Hence, blackboard
models from the simplest demand curve to general equilibrium, to complex,
adapted, economic theories function within unstated but ever present political
constraints, not present in the equations for the purposes of pure
analysis, but absent the political influences of humans in society means they are neglected at great cost to their operational relevance.

Much
economic theory ignores the existence of the States that economies must work
within, yet states in some form from primitive to recent and today’s ‘Big’
Governments have existed since some humans left the metaphorical forests and
peopled the Earth.

Hence, the
competitive free markets at the root of the ‘beautiful’ theories have never
really existed and are unlikely to ever exist whether this fits the “beautiful economic
theories – or their Statist (Marxist ‘dictatorships of the proletariat’ and
Fascist ‘national destinies’) – or not.

Moreover, arguments between ideologies of Left and Right, at root are
political and therefore irresolvable once students leave the blackboards in
their classrooms. Meanwhile, teachers, including brilliant teachers like Peter
Boettke, clear their blackboards and settle down to think of new materials for
their next class.

The same goes
for those in the higher-levels of mathematical abstraction who regularly
publish in the higher academic journals, some, meanwhile, dream of winning their
Nobel Prize and joining the advisory council for a friendly President or Prime
Minster to assure them of the viability of the “invisible-hand theorem from the
self-interest postulate” to wreck or run the state dominated, real less- than- perfect economy allegedly operating “outside their windows”.

It is sad
in a way and predictable, but I remain optimistic for the long run.

Wednesday, January 29, 2014

Misled Consequences of a Views Reporter

“This is the reality of what Adam Smith called the
"invisible hand". This reality is no "invisible hand," but
instead merely the hidden hand,
of top organized criminals. These elite criminals, our aristocracy, buy their
selected politicians, in our "democracy," in this
"capitalism." Andy Denis's brilliant and devastating 2005 "The
Invisible Hand of God in Adam Smith" in Research in the History of Economic Thought and Methodology,
traced the origin of the "very significant apologetic aspect to
Smith": "The message is clear: what is good is good and what is bad
is good as well; everything is for the best, so whatever happens rejoice, and
accept." Smith himself, in 1790, explicitly heaped praise on the
"all-wise Being, who directs the movements of nature," and he said
that, "God himself is the immediate administrator and director" of
everyone. Smith wrote, there, that, "All the inhabitants of the
universe, the meanest as well as the greatest, are under the immediate care and
protection of that great, benevolent, and all-wise Being, who directs the
movements of nature; and who is determined, by his own unalterable perfections
to maintain in it, at all times, the greatest possible quantity of
happiness." He went on to urge "magnanimous resignation to the
will of the great Director of the universe," and he said that, "The
care of the universal happiness of all rational and sensible beings, is
the business of God and not of man." So, unquestionably, it's God's
"hand." A writer like that is the perfect propagandist for the
aristocracy; so, his career was financed by them, and they still spread his
fabrication. They call it "the free market." Of course, back then,
buying and selling slaves was a booming part of it. That's how "free"
it really was.

Is this updated
feudalism really just fascism, not "capitalism," at least not any
democratic form of capitalism? Is it just a Big Lie?

Whose hand is it,
really, that's secretly rummaging through our pockets, while we would get life
imprisonment for stealing just a millionth of what they have already filched?

And celebrations
are held in their honor? Why? Who is paying for this party?”

Comment

Adam Smith's "Invisible Hand" of Crooks is tendentious.

Part III of Moral Sentiments was added to TMS in Smith’s final revision,
published in January 1790, some months before his death after the ms went to his publisher
in December 1789 which was long delayed after his fifth edition, 1781 (see
Smith’s apologetic correspondence with his publisher).It also contained much of his
revisionary editing of his earlier expressions with open and subtle and retractions of his declining
religious faith, instigated from during his days at Oxford 1740-46.

In TMS Part III, pp. 109-78, Smith describes the two sources of the ‘Sense of
Duty’ in mankind, ‘Nature’ and the ‘Will of a Devine Deity’.Smith was careful all of his life to
avoid antagonizing the considerable powers of the religious zealots, then
active in the Church of Scotland and known for their disruptive powers over
those who, in their theologically narrow views’ could, and did, cause personal problems for
signs of deviation from their strict interpretations of biblical doctrine. [For
more detailed treatments, see my paper, “The Hidden Adam Smith in his Alleged
Theology”, Journal of the History of Economic Theory, September 2011, and my chapter
in “Adam Smith on Religion”. 2013. Oxford Handbook of Adam Smith, eds. Berry,
Paganelli, Smith, Oxford University Press].

In consequence, when Andy Dennis, a formidable young intellectual, who
teaches in London and has written widely and deeply on Adam Smith (we have met
and discussed his work at UK History of Economic Theory seminars, which
encounters were always conducted with the proper scholastic proprieties, and
both of us remain unconvinced by each other’s arguments), is quoted by Eric Zuese, an ‘investigative reporter’, he accepts
Andy’s statements without question.

I am bound to say that
Zuese apparently has probably not read TMS and explored what Smith was really
saying, and has simply accepted what Andy wrote in his brilliant published PhD, in the
appropriate context of Smith’s circumstances in a clerically dominated 18th-century, Scottish society.

In the chapter quoted
by Andy Dennis, Smith discusses the ‘rule of duty’ in human behaviour and
identifies the “coarse clay of which the bulk of mankind is formed, cannot be
wrought up to such perfection”, and thereby requires “general rules” to guide
conduct.

Smith discusses men in how
societies “during the ignorance and darkness with pagan superstition” of religious
ideas of their fear of “mysterious invisible beings”, called “upon Jupiter to be
witness of the wrongs that was done to him”.Smith originally analysed this mystical phenomenon in
his 1744 essay on the “History of Astronomy” (published posthumously in
1795).He added in 1790:

“And thus religion, even in its rudest form, gave a
sanction to the rules of morality, long before the age of artificial reasoning
and philosophy. That the terrors of religion should thus enforce the natural
sense of duty, was of too much importance to the happiness of mankind, for
nature to leave it dependent upon the slowness and uncertainty of philosophical
researches”. (TMS III.5.4:164].

With the replacement of pagan
superstition in parts of Europe, the revealed religion of the New Testament took over reinforcing
what ‘”Nature” had prescribed inadequately in its execution and replaced it
with the religion of a single (also invisible) Deity.

Smith described the role of that religious single Deity but, as is typical throughout the last 6th edition of TMS, presents this
knowledge very carefully, not absolutely.

“Since these, therefore, were plainly
intended to be the governing principles of human nature, the rules which they
prescribe are to be regarded as the commands and laws of the Deity, promulgated
by those vice-regents which he has thus set up within us.”

Note that Smith alludes to ‘the rules
of nature” that have now become “to be regarded as the commands and laws of the
Deity” and decidedly are not “the commands and laws of the Deity”.This is an example of many other similar
qualifying terms that avoids Smith’s embarrassment of conflicting with and, thereby, raising the hue and cry of the ever vigilant vigilante-like zealots (during
Smith’s time at Glasgow, as both student and professor, the zealots in the
Glasgow Presbytery charged three Professors of Moral Philosophy with heresy and
hauled them before them to answer the charges).

Near his death-bed in January 1790, Smith was free of
that threat but if he believed in Christian religion he would have been aware
that he was supposedly about to meet his maker. However, his conduct was not risky for a defiant non-believer!

Readers who seek more comments on the
quotations from Smith’s TMS selected by Eric
Zuese (or Andy Dennis) should consult my above-mentioned papers in JHET and the
Oxford Handbook.

As to the implied nonsense
about “financed by the aristocracy” and “fascism”, by a so-called ‘investigative
reporter’, I respectfully suggest that he does a lot more “investigative” work into the Works and
times of Adam Smith before moralising negatively about a long dead person who cannot answer back.

Genuine Question on a Baffling Statement

“Grammaticalization may have therapeutic and pathological effects on
morphology. The paper will focus on these latter with special regard to the
occurrence of a morpheme in an unexpected form as is the case for the West-
Germanic substitutive infinitive. The reason for this mysterious case of
formmeaning mismatch must be sought in the grammaticalization of the Germanic
telic prefix *ga-. As a
consequence of its grammaticalization in the past participle, a semantic
incompatibility prevented the so-called AcI-verbs from being touched by the
grammaticalization wave spreading the perfect periphrasis throughout the whole
verbal system. Thus, the arguably default form came in, namely the infinitive,
whereby the perfect periphrasis could be completely paradigmaticized even
though at the cost of a form/meaning mismatch. In this light, the long-wave
effect of grammaticalization can be made responsible for the anomaly preserved
until today in all West-Germanic dialects, in which ge- was grammaticalized as
an inflectional marker.”

Comment

When you do not know what someone is talking about, it is probably best to
say nothing.

So I shall abstain on this occasion. But as a metaphor describes its
object in a “more striking and interesting manner” (Adam Smith, 1762-3, p. 29. “Lectures
on Rhetoric and Belles Lettres”, Oxford University Press and Liberty Press, my
question to Livio Gaeta would be: of what object does the IH metaphor on this
occasion refer?

Misplaced Certainty From Moderate Voice

William Kern posts
on The Moderate Voice (“An Internet hub
for centrists, independents and moderates with domestic and international news,
analysis, original reporting and popular features from the left, center and
right”):

“Participating individuals pursue their own
personal goals, sometimes in competition, but they contribute to the general
interest. Free competition leads to the gradual elimination of error. Marc
Foglia, in his book on Wikipedia, draws a parallel with one of Adam Smith’s
18th century theories. Just as in economics, the “invisible hand” will always
guide Wikipedia toward increasingly reliable information.”

Comment

The anonymous authors have
bought into the modern myth of the ‘invisible-hand” which does not exist and
which Adam Smith never credited his use of the metaphor to have the
“miraculous” power that it “will
always guide Wikipedia [or anybody or anything else] toward increasingly
reliable information.”

It certainly does
not do that in any known economic system.So why would it do that for a web site, even if staffed by well-intended
people (remember: 'the road to hell is paved with good intentions, etc.,') and human motives
lead to actions that can, and often do, have unintended consequences, as Adam
Smith noted, but as regularly those consequences are not benign, especially in economics.

Therefore, I do not have confidence that Wikipedia will buck that trend and “always” begat “reliable
information”.It doesn’t happen
anywhere else, and certainly not in economics.

The “wisdom of
crowds”, likewise is a dangerous tiger to ride upon. The enthusiasm of crowds
can produce appalling outcomes, as Nazism and Communist revolutions showed, as
well as cheering crowds at some adorable political figure who leads their party, and the
country, into a dead-end.

Adam Smith versus John Nash on Self-interest

A regular number
of different readers write to me about posts I made in 2005-2009.Some of these posts were from students taking up defending Noam Chomsky’s views on the importance of Adam Smith allegedly
recanting his views on the division of labour in Wealth Of Nations, which, in my view, is
not true.These comments were
usually sent around the same months of each year, from which I surmised that a
class teacher somewhere put the reference on his reading list. (No, I am not
paranoid!).

Here is another very ‘late’
comment on a post on a different subject, this time referring back to my original
post on the John Nash theorem in 2007.This time I criticised the lines given to John Nash, by
the Hollywood scriptwriter for the semi-biographical film, ‘A Beautiful Mind’,
containing a scene on a boy’s night out, into which bar came an attractive
young woman.All the boys make a
beeline for her to ‘chat her up’, as is said by kids.Of course the mass ‘chat
up’ fails, to which the John Nash character comments sourly about how their
competition predictably disrupted each others efforts, and concluding that Adam
Smith was wrong about the positive influence of competition.

The post generated
some comments from readers.Similarly,
over the years I have replied to other reviews of “Beautiful Mind” when they
come up, especially because they repeat the canard about Smith being wrong and
John Nash on the boys night out being right.

I reproduce the
original post below and my original comment:

My Post from Lost
Legacy, February 2, 2007:

“John Nash Was Not
Right about Adam Smith Being Wrong”

“I found a most
interesting piece of commentary that is one of those that goes almost far
enough, but not quite in its thinking, and I would like to examine its good
points and suggest how it might be made completely accurate. The extract states
what the author considers a difference between Adam Smith and John
Nash, or rather an Hollywood scriptwriter’s version of the differences.
Fine. I am not snobbish and given only to contesting the ideas of tenured
professors out of Chicago; I’II take on Hollywood scriptwriters too, yes Sir.

The author is
someone from The Amrita School of Business blog (2 February), but I know
no more about him or her. The author writes:

“As the great
Adam smith stated, - the market benefits when everyone does what is good for
him; we are unknowingly following his path, and take for granted that the whole
market is benefited.

However, instead
of following Adam smith, only if we follow the versions of Prof. Nash, we all
would be in a better situation.

Prof. Nash
suggested that the market benefits, when one does what is good for him and also
for the group. Following this idea, if we try doing well for ourselves and at
the same time, think for gain of the whole group; we all would be in better
situation.

By
following Adam Smith’s principle (self interest), we are actually blocking each
others way and giving rise to ambiguity and dissatisfaction. Instead if we
think of others (Prof. Nash’s Theory) and follow what is stated below every one
will be benefited.”

2007 Comment [GK]:

John Nash wrote a
seminal paper for Economica in 1950, ‘On the Bargaining Problem’, which
set out certain far reaching and basic assumptions that, in effect, eliminated
from consideration the process known as bargaining, and substituted instead a
consideration of the outcome after two parties bargained. In short it is a
study of the solution of bargaining, it is not a study of how two (or more)
bargainers arrive at a solution.

The optimal
solution (Pareto efficient) shows that the division of an amount of the various
items available for trade with varying numerical utilities for the bargainers
is the one where the product of the net gains in utility of each bargained set
is maximised. Any attempt to redistribute the sets would make one or both of
them worse off.

Hence our author
concludes that “if we try doing well for ourselves and at the same time,
think for gain of the whole group; we all would be in better situation.”
However, accepting as true the conclusion, it does not solve the bargaining
problem. The problem is not one of achieving an optimal outcome, so much as one
of how to achieve that optimal outcome. Nash [in his paper, not the film] eliminated
the most interesting part of the problem by his assumptions (the boys in his [1950]
example had perfect information about each other’s utilities for the items
available for trade, their bargaining skills were eliminated, and they both
knew what each would trade their items for in the bargaining.

Mathematic
modelling is only determinate (has a solution) if these conditions operate.
They don’t, so apart from being an instructive exercise into the nature of an
optimal solution, it is also non-operational.

Smith wrote on the
bargaining problem in Wealth of Nations (Book I), but he discussed the
process not the solution. So Smith and Nash were addressing different parts of
the problem, and like apples and pears, it is difficult to see how a valid
comparison can be made between their different solutions. Following ‘the
versions of Prof. Nash … instead of following Adam Smith’, will not get us
very far because the Nash version is non-operational, it does not address how
we conduct the process.

Smith said
bargainers address each other in something like the following manner: ‘Give
that which I want and you shall have this which you want’ and ‘it is this
manner that we obtain from one another the far greater part of those good
offices which we stand in need of.’ (WN I.ii.2: p 26) Now he doesn’t say
how they should formulate their solution at this point, but he hints very
strongly how this should be done (in fact he is quite prescriptive on the
point).

In that most
famous quotation from Wealth of Nations, of the transaction (process) among the
‘butcher, brewer, and baker’, he observes: ‘it is not from their benevolence
… but from their regard to their own interest.’ So, if the bargainers want
something from the other party they have to take full account of the other party's, not just their own, self-interest. Yes, they have to think of the other person’s
self-interests first and bargaining allows for a mediation of their different
interests into the common interest of a voluntary settlement. We call that
negotiation; ‘the process by which we obtain what we want from someone who
wants something from us.’

Yet, the author of
the piece from Amrita Business School asserts: that following Adam Smith’s
advice “we are actually blocking each others way and giving rise to
ambiguity and dissatisfaction.” Having shown that is not what Smith said
(anywhere in his writings), I think that author needs to rewrite his sentence.

But we have not
yet done, because Smith said more. He advised prescriptively (so Smith did not
consider it optional) that ‘we address ourselves, not to their humanity, but
to their self-love’, which is clear enough in advising the bargainer not to
address herself to her own self-love. To make this clear, he also advised her ‘never
to talk of them of our own necessities, but of their advantages’. Again, it
is clear: don’t think of your needs, think of their advantages from completing a bargain with you, and to do this effectively you must look for what
advantages trading with you has for him, not yourself.

In what manner can
this ever be described as ‘blocking’ or causing ‘dissatisfaction’, if the
bargainers are doing exactly the same by addressing the other party’s interests
and the other party’s ‘advantages’? Is this not exactly what Nash was
supposedly suggesting? If it is different, enlighten me. Are we reading from
the same page?

However, I think
there is another problem, apart from the weakness of the Nash solution
addressing the outcome of the optimal bargain but not able to offer any help
with how to get to it, and the weakness of the author’s understanding of Adam
Smith’s contribution, which dealt with the process, and that is the possibility
that our author is mixing up the Prisoner’s Dilemma solution with the Nash
Theorem. They were both published around the same time in 1950, and are often
mixed up (especially in examinations from poorly prepared candidates).

Prisoner’s Dilemma
shows that the choice is between doing best for oneself or doing best for both
parties. People play ‘co-operate’ or ‘defect’, and those that defect do so for
one of two reasons. In effect, the defector acts to protect himself from
possible defection by the other (‘I defect, not because I want to, but because
I must’), or the defector does so because he intends to exploit the other
player (‘I defect not because I must, but because I want to’). Unfortunately,
depending on the pay-offs in the game, defection is the majority choice by a
long way in my experience of conducting thousands of games in my negotiation
courses (about 92 per cent play the defection ‘red’ against the co-operators
‘blue’).

Interestingly, its
creators wrote to Nash not long after the papers circulated, but Nash did not
reply to their request for his comments. But that’s a long way from the
Hollywood scriptwriter, who stuck Russell Crowe’s/John Nash’s inserted the
side-attack on Adam Smith’s alleged views.

We don’t’ need to
look far for where the script writer got these absolutely wrong views he
attributed to Smith; they come from the Chicago version of Adam Smith and not
the man from Kirkcaldy. Chicago never has understood Smith on bargaining (let
alone the corpus of Smith’s works), and they have a lot to answer for in
their miss education of generations of economists in what Adam Smith actually
wrote about.

It’s not as if it
is difficult to get a hold of a copy of Wealth of Nations…

“You shouldn't take it so seriously. The text you quote is almost
exactly the same, word by word, as a few lines from the film A Beautiful
Mind, where Nash's ideas are misrepresented heavily, especially in that
part. In any case, Nash equilibria have nothing to do with what's best for the
group. It's about your best choice given everyone else's best choice, when
facing the same problem as you are. Even so, by core convergence/Edgeworth
conjecture, under certain attractive assumptions, the Nash equilibrium
converges to the competitive and Pareto efficient equilibrium. The people at
The Amrita School of Business should better stop stealing lines from
superficial movies and start reading on the real deal.

I am with Gabriel Mihalache... "People shouldn't take it so
seriously"... but unfortunately this page is still showing up at the
first place of search engine results when you google "Adam Smith John
Nash" keywords... You can check yourself... http://www.google.it/search?hl=it&q=adam+smith+john+nash&meta=

Podríamos decir que Nash hace un estudio Normativo de la Economía, de lo
que debería ser, y Smith ha hecho un análisis positivista de la economía, de lo
que realmente sucede en la psiquis humana. We could say that Nash makes a
normative study of economics, than it should be, and Smith has done a
positivist analysis of the economy, of what actually happens in the human
psyche”.

Todays Comment by a reader:

John Nash comment

“I
disagree with many of the other comments. With the extremely strong gut-feeling
that most people did not know who John Nash was until the movie appeared (or
even Adam Smith!), I think it is very valuable for someone to point out
important discrepancies between fiction and reality. As a case-point, I
actually did previously believe John and Adam were talking about the exact same
problem -- go figure! I learned something new today and I'm content. Thank you
author.” On John Nash Was
Not Right about Adam Smith Being Wrong.

Monday, January 27, 2014

Adam Smith and Unintentional Desirable Outcomes

“Anon” quotes from J. J. Rousseau and posts (26 January)on
“Capitalist Imperialist Pig” (since 2004, no less) with a rather confusing,
though well argued anti-Libertarian, intellectual slant, that sees the previous
lives of humans from “100,000 year ago” as a universal “paradise”, until, that
is, our distant predecessors began to leave the forest for shepherding and
farming about 8,000 years ago, and then on to commercial societies.That process is now complete, except
for a few thousand acres in very remote pockets. HERE

“I think I've read that the
phrase "invisible hand" occurs only once in Adam Smith's Wealth of Nations, but nothing else from
economics is so sacred or sacralized. His insight was that the workings of a
competitive market would produce a number of socially desirable outcomes. This
insight was central to classical economics, and, dressed up in mathematical
glad rags, central to neoclassical economics, and its offspring, like the Real
Business Cycle theory. Now Adam Smith was a very clever fellow, and he knew
that business men really hated free competition, and would work the levers of
power to eliminate it, but he probably underestimated their skill at eliminating it.”

Comment

No, I shall abstain from
tackling the myth of the “invisible hand” metaphor (new readers may scroll down
Lost Legacy and read my weekly jousts with the “sacred” myth).

I shall amend the shy Anon author’s
statement: “His [Adam Smith’s] insight was
that the workings of a competitive market would produce a number of socially
desirable outcomes.” That is too narrow an assertion, especially with the
definite verb: “would" which should be “could” as there is nothing in Adam
Smith’s “Wealth Of Nations” that is so definite about “socially desirable
outcomes”.

Any
reading of Smith’s WN would inform the attentive reader whom, sorry to say, is among a small minority of the small minority of modern economists who have read
“Wealth Of Nations” at all, beyond a compendium of selected quotations.Most, that is nearly all, modern
economists never get very far with Wealth Of Nations, though quite a few have
it on their book shelves.

If
they did read it they would find mention after mention of Smith’s rather dismal
view of the behaviour of “merchants and manufacturers” and the privileged
minority who were eligible to become legislators acting against the
interests of labours and toilers, as well as the general interests of the public
(as did their feudal predecessors before them – “vile rulers of mankind”.

Sometimes,
merchants and manufacturers did cause actions in their own self-interests that
led society to “unintended consequences”, some of which accidently served the “public good”.But this was not a general, let alone, a universal consequence of the self-interests of “merchants and manufacturers”
(the word capitalism was not known in Smith’s time as it was first used in English
in 1854).

In
this respect, neoclassical economics was no improvement. In fact its so-called ‘scientific’ methodology
was a great diversion.

I shall leave "Anon" to his quarrel with Libertarians. The "Hard" Libertarians do have some odd ideas, but, then, that is why I am a "soft" Libertarian

Saturday, January 25, 2014

Adam Smith's Self Interest is Not Served by Selfishness

A correspondent asks
about the natural role for co-operation in an economy, and below is my (short)
response:

“Adam Smith addresses the substance of your paper. You are correct
that Smith did not advocate nor excuse selfish behaviour. He writes to
that affect throughout both ‘Moral Sentiments’ and ‘Wealth Of Nations’.
Moreover, and most relevant, he was quite clear on the substance of your basic
theme: humans everywhere depend on the voluntary co-operation of thousands of
others (WN I.ii.). That is the essential feature of any economy in any
society.

Anthropologists show how human small bands
(fewer than 30 adults) depend on each other for their sustenance, sharing in
times of need and in many cases institutionalising this natural ‘insurance’
behaviour (observed not conjectured) in band-wide pooling of the products of
their labours each day, which brings reciprocal sharing behaviours that
empirically substantiates Smith’s point (in his case conjectured, not
necessarily observed). For examples see Christopher Boehm. 2012. ‘Moral Origins:
the evolution of virtue, altruism, and shame’. Basic Books. (Based on scores of
fieldwork cases and specialist observations over many years).

However, Smith’s conjectured point led to
his firmly and clearly asserted advice in his famous passage in Book 1, chapter
2, of the “butcher, brewer, and baker” example, widely misread (if read at
all), with its specific emphasis on the male buyer (more likely his female relative!)
searching for the main ingredients of his dinner requiring him to “address the
interests (‘self-love’)” of the sellers, and specifically not address or refer
to his own self-interests!

The needs of the buyer are not an explicit
part of the persuasive side of such transactions – that would mean the buyer
relying on the seller’s benevolence, already excluded because benevolence was
an “insufficient” resource (basically because nobody has enough of the means of everything to
be totally benevolent towards everybody else for everything).

In short, Smith advised buyers to address
their self-interests solely by addressing the self-interests of others, that is
self-interests are only realised on a daily basis by each individual party to
the transactions mediating their self-interests through persuasion,
conversation, and bargaining, not by egotistically demanding others surrender
to ours. This is fundamental to the Smithian doctrine of self-interest. It was also
common in successful negotiations between self-interested and often
antagonistic parties (as my 25 years fieldwork confirmed as a consultant
negotiator in my former day job at Edinburgh Business School).

George Stigler’s 1976
opening admonition that economics is founded on the “granite of self-interest”
needs to be modified by the inclusion of the words “the granite of mediated self-interest”!
Smith might then have saved the Chicago ‘boys’ from embarrassment in Chile if they
had read Smith properly and not been enthused by Stigler’s enthusiasms for a
half-understood idea that wasn’t Smith’s anyway.

Wednesday, January 22, 2014

Good Sense on Economics, Adaptation, Complexity and Evolution

William Peakin,
business correspondent, author of the ‘Evolution of Wealth” in “Holyrood”,
Scotland’s fortnightly political and current affairs magazine covering issues
debated at the Scottish parliament in Edinburgh, manages to cover this broader
debate in an informed manner that shames the narrow, blinkered focus of many of our
leading economists in US and Europe in a short article “Evolution of Wealth”, “We need to rethink the meaning of work,
consumption and prosperity” HERE

Comment

This is quite the
most perceptive short article I have read on the current debate among
economists on how a market economy operates, ‘warts and all’ as Oliver Cromwell
might have put it.

It addresses a basic
problem for modern and classical economists on the nature of markets and how
they were analysed by neo-classical and post neo-classical modern economists.

Peakin reports how Eric
Beinhocker, executive director of a joint research programme between the
Institute for New Economic Thinking and Oxford University, recalls “sitting in
a thatched hut, leaning against a wall made of dung, talking to a group of
Maasai tribesmen. They were feeling sorry for the former venture capitalist and
McKinsey & Company consultant because he had told them he had no cattle.
But they were also bewildered; how could this poor man afford to travel and own
a camera?”

From analysing the
importance of such natural misconceptions and their clarifications, Beinhocker suggests
that “Modern evolutionary theorists believe that, like gravity, evolution is a
universal phenomenon, meaning that no matter whether the algorithm is running
in the substrate of biological DNA, a computer program, the economy, or in the
substrate of an alien biology on a distant planet, evolution will follow
certain general laws in its behaviour.

“If the economy is
truly an evolutionary system, and there are general laws of evolutionary
systems, then it follows that there are general laws of economics – a
controversial notion for many.

“Saying that there
are laws of economics does not imply that we will ever be able to make perfect
predictions about the economy, but it does imply that we might someday have a
far deeper understanding of economic phenomena than we do today.”

These ideas were
preceded by a remarkable transformation from the regular lives of humans in the
open savannah: the discovery of value, not measured in pounds, pence or
dollars, but in what the products of human labour, including endeavour, enabled
humans to do.All human
history, including the long, very long, pre-history story of the
creative blessing of the use of valued items, ideas, and their accessibility to
every widening numbers of others besides their creators.

What William Peakin,
business correspondent, author of the ‘Evolution of Wealth” in “Holyrood”,
Scotland’s fortnightly political and current affairs magazine covering issues
debated at the Scottish parliament in Edinburgh, manages to cover this broader
debate, in an informed manner that shames the narrow focus of many of our
leading economists in US and Europe.

Certainly, his
presentation of the post-classical theorists on complex, adaptive systems,
recently discussed on Lost Legacy, and, more thoroughly, in David Simpson’s
“The Rediscovery of ClassIcal Economics: adaptation. Complexity and
growth” (Edward Elgar) 2013, is a welcome gale of good sense.

I cannot recommend
too highly that you follow the link and read it (and pass it round). William
Peakin deserves acclamation for his perceptive presentation of Eric Beinhocker’s
ideas, particularly from my own vantage point, because he does not mention anything
about the mythical “invisible hand” nonsense that is the usual resort of the mystics
dominating our profession!